Friday, September 27, 2013

Credit Markets Signal Bigger Fear Of Treasury Default Than In 2011

Earlier in the week we noted the spike [5] in the cost of protecting against a technical default on US Treasuries. While well below "record" wides of 2011, a very interesting event has occurred. The cost of 1Y protection has surged higher than the 5Y protection - something we have only seen in the summer of 2011. However, this time it's different as the inversion is even greater than in 2011 - although not the most liquid instrument in the world - implying a greater chance (albeit a small probability) of a postponed payment in US Treasuries. As we noted previously, there is a way to trade this away from CDS-land [5].

USA CDS curve inverted more than in 2011...

And the 1m1y Treasury bills flattener is working in our direction [5]...
Charts: Bloomberg